Office Demand Exceeding New Supply

The rate of business expansion is far outpacing the rate of new office building development, according to a new report from CBRE Group Inc.

Last year, as U.S. employment grew by 3 million jobs, or 1.9%, the amount of space occupied by businesses grew by 52.7 million square feet. That was a 46.3% jump in so-called “absorption” over 2013 and the highest level since 2007, the report said.

Meanwhile, only 22.3 million square feet of new office space was constructed last year, the report said. That amount is less than half the historical average and 65% of 2014’s new supply was concentrated in only five markets—Houston, New York, Dallas-Fort Worth, Washington, D.C. and San Francisco.

That imbalance between new supply and demand is driving down the national vacancy rate. It was 13.9% at the end of 2014 compared with 14.9% 12 months earlier, according to CBRE.

But it was still higher than its pre-crash low of 12.4%which was hit in 2007. Because of sluggish job growth during the earlier years of the recovery, the office market has been slow to rebound.

The steady improvement in the office market has been luring “unprecedented levels of capital into the sector” since the recovery began,says Spencer Levy, who heads research for the Americas at CBRE.

The global brokerage found that the total sales of office buildings rose 15% in 2014 to $119 billion. But the total is still well below its pre-crash peak in 2007 when $214 billion in office buildings were sold in the US.

CBRE forecasts that the total dollar volume of office investments will rise another 15% in 2015, pushing prices—especially in large coastal American cities—upward.

Still, Mr. Levy’s not worried about a bubble in office values.

Among the reasons for his optimism: investors are less reliant on financing projects with debt than they were in the years before the crash.

“Memories of the downturn are still fresh,” says Mr. Levy. “But this time is a little different… From my perspective, there’s still room to grow.”

Al Pontius, who heads the National Office and Industrial Properties Group for broker Marcus & Millichap, is also bullish about the office sector. But he points out the recovery’s biggest benefits have flowed toowners of properties in a few key coastal American cities.

“What has been happening in the last few years was the competition for best-in-class trophy assets,” says Mr. Pontius.